A recession is generally defined by economists as two consecutive quarters of negative GDP, an event which last occurred in Australia in 1991 which became known as “the recession we had to have”. Since that time, Australia has had the odd negative quarter, such as in the September quarter of 2016 and the March quarter of 2011, but not two in a row.
The latest figures released by the ABS indicated third quarter GDP grew by 0.6%, just under the 0.7% expected by economists. Even though the growth rate over the September quarter was less than June’s 0.9%, the year-on-year figure increased from 1.9% (after revisions) to 2.8%, which was also under the 3.0% figure expected.
Bond yields and the Aussie dropped on the release of the figures. 3 year bond yields finished the day 7bps lower at 1.96% and 10 year yields were 9bps lower at 2.53%. The local currency dropped from 76.15 U.S. cents to 75.85 U.S cents and then finished around 75.80 U.S. cents.
The quarterly figures were primarily driven by increased private investment in the form of non-dwelling construction, while a fall in public investment and more imports held back the total growth rate.
The reaction from economists was not unanimous. ANZ Head of Australian Economics David Plank took a cautiously optimistic view of the latest GDP figures. “The result highlights the disparate influences on the economy at present, with household spending under pressure but investment strong.” Over at Westpac, chief economist Bill Evans’ view was expressed bluntly. “This print will come as a major disappointment for the RBA. The big concern is whether households, the engine of the economy, accept that expectations of a lift in wages growth are unjustified and it becomes necessary to adjust spending to a lower income outlook.” Commonwealth Bank senior economist Michael Workman’s interpretation was somewhere in between. “So the economy is travelling relatively well in an overall activity sense. But it doesn’t feel like it. Mainly because household disposable income growth is poor, thanks to unusually weak wages growth.”
With respect to the RBA’s view of the figures and thus the likely course of future rate decisions, the ANZ and Westpac economists took opposing views. Plank focussed on the Australian economy’s ability to grow despite subdued household spending. “For policymakers, there might be some encouragement with the lift in income and the somewhat higher household savings rate. This highlights that the economy can grow around trend even if the household sector is contributing little so long as investment side remains strong. And the forward indicators suggest investment will remain solid.” Evans was more direct. “The current consumption growth of 2.1% makes the authorities’ forecasts of consumer spending growth of 2.75% in 2017/18 and 3.0% in 2018/19 appear optimistic.” If Evans is correct then the RBA might be forced to lower its GDP growth forecasts for these periods. “A constrained consumer and the associated uncertainty for business will make it very difficult for the RBA to achieve its 3.25% growth forecast for 2018.”